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Exam 2 Study Guide

The Exam 2 Study Guide covers key concepts in economic growth, including the Malthusian Trap, benefits of economic growth, and factors affecting GDP and population growth. It also discusses aggregate demand and supply, the Solow Growth Model, and historical economic events like the Great Recession and Great Depression. Additionally, it highlights various schools of macroeconomic thought and their differing perspectives on economic issues.

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2 views4 pages

Exam 2 Study Guide

The Exam 2 Study Guide covers key concepts in economic growth, including the Malthusian Trap, benefits of economic growth, and factors affecting GDP and population growth. It also discusses aggregate demand and supply, the Solow Growth Model, and historical economic events like the Great Recession and Great Depression. Additionally, it highlights various schools of macroeconomic thought and their differing perspectives on economic issues.

Uploaded by

james6kelleher
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Exam 2 Study Guide

Introduction to Economic Growth

- What is the Malthusian Trap? What did Malthus believe was the driver of population growth?
- Why Malthus’ prediction about population and wages wrong in context with the world today?
- List 3 benefits of economic growth, and describe how economic growth brings these changes
about in an economy
- Describe in detail why the population growth rate declines rapidly after an economy is lifted out
of extreme poverty.
- If a nation has GDP growth of 4%, the Price Level increases by 1.5%, and the population
increases by 1%, what is the rate of economic growth?
- How does a small change in the rate of economic growth have a large impact on an economy’s
income over long spans of time (think decades or centuries)? Illustrate this with an example.
- Suppose over a period of 20 years, Real GDP per capita for a country rose from $600 to $800.
Find the rate of economic growth.
- What are the 3 main sources of economic growth? Give an example of each.
- Why can taxes that are too high be harmful for the rate of economic growth?
- Why do open and competitive markets help foster economic growth?

Aggregate Demand and Aggregate Supply

 Why can’t we simply use the argument that the aggregate demand curve is downward sloping
for the same reasons that the demand curve is downward sloping in a single market? What 3
arguments must we use instead? Give an example of each
 What is potential GDP? How is potential GDP related to Aggregate Supply? If GDP>Potential
GDP, what can we say about the unemployment rate?
 What factors can shift LRAS? Give an example of a change in each and what direction LRAS
would shift
 Would banning wage contracts for workers reduce price stickiness in an economy? Why or why
not? Would it eliminate price stickiness? Why or why not?
 In the AD-AS model, what happens to equilibrium output, the price level, and the
unemployment rate in the short-run when AD shifts to the right. The long run? Use a graph to
justify your answer
 Using a separate graph for each, show what would happen in both the short and long-run for
the AD-AS model given each of the following effects:
o A drought wipes out a major portion of an economy’s crops
o Households expect their incomes in the future to increase by 20%
o Investors become more optimistic about the profitability of future investment

o The Government decreases spending to reduce the federal budget deficit


Solow Growth Model

 Briefly explain the difference between exogenous growth and endogenous growth. What type
of growth is the Solow Growth model and why?
 Given the assumption that all savings in the Solow model is used in the loanable funds model,
what is the relationship between the savings rate and the interest (rental) rate (on capital)?
 The Cobb-Douglass production function that we have used in this class is K^α*N^(1-α). What
does α represent? If α = 1/3, what does this tell us about the percentage of firm’s costs allocated
to labor?
 Given that the rental rate on capital (MPK) is αK^(α-1)*N(1-α), and the wage rate for labor
(MPL) is (1-α)K^α*N(-α), derive the firm’s profit function. Will profit ever be non-zero? Why or
why not?
 Given F(K,N) = K^α*N^(1-α), derive the intensive form of the Cobb-Douglass production
function.
 Suppose an economy started with 8 units of capital per worker (I.e. k0 = 8). Let α = 1/3, delta
= .10, S = .30. Will the steady state level of capital per worker be greater than, less than, or the
same as k0? How do you know this? Would the steady state level of capital per worker be
greater than, less than, or the same as k0 if S was now .40?
 Given the Law of Motion of Capital, what is the relationship between the depreciation quantity
of depreciation and total savings in the steady state? Derive this as an equation and interpret it
in words.

-The following graph represents the Solow Growth model in intensive form
a. Show on the graph the quantity of consumption in the steady state.
b. If delta*kt>S*f(kt), will the capital stock in the next period (kt+1) be larger or smaller
than kt? Find some level of kt on the graph where this is satisfied

-Critically evaluate the following statement: Since economies converge to a steady state level of capital,
income and consumption, all economies will eventually converge to the same level of income given
enough time.

-In one or two sentences, given an explanation as to why a change in the depreciation rate of capital
changes the steady state level of capital (k*)

The Great Recession, The Great Depression, and Schools of Macroeconomic Thought

-Generally, does the unemployment rate peak at the end of a recession? Why or why not?

-What are bubbles, and why do they occur? When a bubble “bursts”, what effect can that have on an
economy?

-Briefly explain why the housing market bubble had a greater impact on the macroeconomy than the
tulip bubble is estimated to have had.

-What event is generally viewed as the onset of the Great Depression? Why do events like this often
occur near at the beginning or during a recession?
-What effect did the Smoot-Hawley Tariff act have on the already declining economy during the Great
Depression? What was the rationale of Congress for putting these tariffs in place? What unintended
consequence did it produce?

-What are some of the main disagreements between the Austrian and Keynsian schools of
macroeconomic thought?

-What were some of the main criticisms of the Keynesian school in the 1970’s?

-What do Monetarist macroeconomists generally advocate for? Do Monetarists believe in the concept
of sticky prices?

-What is the key emphasis of the Real Business Cycle school of thought? Do RBC economists assume
sticky or flexible prices?

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